Abenomics Banks on Japan Post

 
 

Japan Post’s $12 billion initial public offering could herald further gains for Japanese stocks, as the world’s biggest IPO for 2015 captivates investors. But for Prime Minister Shinzo Abe, a successful market debut for the 144-year-old mail delivery and financial institution could prove crucial in persuading skeptical voters of the benefits of reform.

Coming a decade after Abe’s reformist predecessor Junichiro Koizumi first pushed postal privatization, Wednesday’s triple listing of Japan Post Holdings Co, Japan Post Insurance, and Japan Post Bank could help unleash an army of savers in the nation’s biggest IPO this century.

According to the Nikkei, the bank unit will debut at 1,450 yen ($12.01) per share and the insurance firm at 2,200 yen, putting their price-to-book ratios well below average. Dividend yields for the bank, insurer and parent will be an attractive 3.4 percent, 2.5 percent, and 3.3 percent respectively, well above the benchmark 10-year government bond yield of 0.3 percent.

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While Japanese households have amassed 1.7 quadrillion yen in financial assets – equivalent to the eurozone’s entire output – more than half lies in low-return cash and deposits, with only 11 percent in stocks, compared to 34 percent in the United States and 18 percent in Europe.

With more than 80 percent of shares in Japan Post being sold to individual investors, Abe hopes to build a shareholding culture that would see citizens benefit more from the record corporate profits amassed under Abenomics.

“Waking Japan up to the risk of not taking risks has been a very good thing,” said BlackRock’s Dan Chamby told Bloomberg News. “You have lost an entire generation of equity investors. I believe this is part of the policy thrust of the prime minister, which is to create long-term investors in Japan.”

The government’s decision to use 4 trillion yen worth of anticipated privatization proceeds to help fund Tohoku’s post-disaster reconstruction has helped placate critics, who feared a wave of job losses and post office closures in rural areas. Investors have voted with their wallets in supporting the IPO, with the government pricing shares in the three Japan Post entities at the top end of their ranges after demand greatly exceeded supply.

According to Reuters, Japan Post Holdings and Japan Post Bank received bids more than five times their share offerings, while Japan Post Insurance was 15 times oversubscribed. With all three stocks to be listed on the Tokyo Stock Exchange’s First Section, they will automatically become components of the benchmark Topix index at the end of November, giving them another boost from an estimated 200 billion yen worth of institutional buying.

For new investors, punting on a government-backed IPO appears a good bet. According to Bloomberg data, Japan’s 10 biggest IPOs have averaged a 44 percent gain in their first year of trading, with eight of these including NTT Docomo’s record $16 billion IPO in 1998 having enjoyed government support.

“The government can’t let these deals fail,” Toyo Securities’ Hiroaki Hiwada told Bloomberg. “Shares of state-backed firms that are unleashed by the government typically perform well as time goes by, because the country wants to see their success.”

While the IPO will see just 11 percent of Japan Post Holdings shares sold to the public, the government ultimately aims to sell as much as two-thirds of the holding company as well as fully privatizing its two financial subsidiaries.

Risks Ahead?

As previously noted by Pacific Money, Japan Post has already moved to diversify its revenues by acquiring Australia’s Toll Holdings in a record $5 billion deal, its biggest acquisition yet. While Tokyo-based Japan Post boasts annual revenue of 2.7 trillion yen and nearly 200,000 employees, it still trails international competitors such as Germany’s Deutsche Post and U.S.-based UPS, currently ranking fifth internationally in revenue terms.

The newly privatized entity will also inherit a network of nearly 25,000 branches, more than all of the nation’s banks combined, which due to its universal service obligations will be difficult to scale back. According to the Nikkei, the universal service obligation eats up around half of Japan Post Holdings’ annual net profit, which previously was covered by its two financial subsidiaries.

Like other postal services internationally, the postal unit is facing reduced revenues and is not expected to regain profitability until fiscal 2017 at the earliest. Mail deliveries in 2013 were down 30 percent on the peak year of 2001, while the continued decline of the nation’s rural population has diminished the domestic growth prospects of the postal business, which serves as a lifeline to the outside world in many regional areas.

Japan Post has forecast a 23 percent slide in annual profit for fiscal 2015, with returns on its Japanese bond holdings also dropping as interest rates decline. The group’s main money-spinners are its banking and insurance units, which could soon start competing with private banks should lawmakers approve its plans to start making loans to homebuyers and companies.

“Unless Japan Post Bank is permitted to expand into new businesses, it may be hard to boost profits,” Rakuten Securities’ Masayuki Kubota told the Wall Street Journal.

Japan Post Bank controls more than 200 trillion yen in assets, and with about half in government bonds it has been moving to diversify into foreign bonds and stocks. In June, a group of ruling party lawmakers proposed tripling the ceiling on postal savings deposits to 30 million yen, a move bitterly contested by its private competitors.

The new bank “carries an enormous amount of interest-rate risk,” Japanese Bankers Association chairman Yasuhiro Sato warned. “We think these kinds of problems are going to be spotlighted even more as a publicly traded company.”

Yet according to the Nikkei, the Japan Post group could follow the model of another former state-owned company, Japan Tobacco, which has used overseas acquisitions to expand. Since listing in 1994, the company has bought the non-U.S. tobacco business of RJR Nabisco and Britain’s Gallaher Group, helping to drive its share price around 3.5 times higher than its IPO.

Japan Stocks Touted

The early gains from record quantitative easing under Abenomics helped propel Japanese stocks to more than a 55 percent annual gain in 2013, as exporters enjoyed the benefits of a weaker yen. Yet although this year’s rise has been a more modest 7 percent, analysts are expecting further gains on the back of increasing corporate earnings and an accommodative central bank.

Japanese companies earned a record 58 trillion yen in the year to March 2015, up nearly 10 percent on the previous year, with flagged corporate tax cuts expected to further lift profits.

In an October 1 announcement, Nikko Asset Management said Japanese corporate earnings should continue to rise over the next two quarters, lifting stock prices.

“We believe Abenomics is working well, especially for corporations, with the second-quarter pre-tax profit margins soaring to historic highs for both manufacturing and non-manufacturing sectors,” said John F. Vail, chief global strategist and head of Nikko’s global investment committee.

The fund manager expects Japan’s benchmark Topix index to gain 8.5 percent in yen terms over the six months through to March 2016, with Tokyo stocks expected to rise by around 10 per cent in the year ahead, including the effects of dividends.

“Japanese companies have thin operating margins, so any improvement in global growth always has a large multiplier effect on their bottom line. Secondly, there’s the trend of corporate governance improvement, leading to a greater focus on [return on equity]. Profit margins are high by historic standards but still low by global standards, so there’s still room for them to grow,” Vail was quoted saying by Morningstar.

“U.S. and European earnings estimates for 2015 have been falling over the year to date, whereas for Japan they’ve been holding up well, if not increasing. Japan has better earnings prospects, a lower market P/E [price/earnings ratio] and there’s still a lot of cash on the sidelines in Japan which can be invested,” he added.

Investment bank UBS has also stated its preference for Japanese along with European equities, stating on October 30 that both were supported by similar dynamics: “an accommodative central bank, currency weakness boosting exporters, oil price weakness leaving consumers with more disposable income and a relatively positive outlook for corporate earnings growth.”

For Abe, converting a nation of low-risk bank savers into higher-risk stockholders could go a long way toward increasing the popularity of his reforms, which have been criticized for inflating prices and lifting corporate profits but not padding workers’ pay.

With the Nikkei Stock Average still well below its bubble-era peak of 38,915, Japanese stocks still have plenty of room to recover for investors willing to make a bet on Abenomics.

Disclaimer: The author holds no Japanese shares and this article is not intended to provide financial advice.

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